Contingent Fees for Personal Injury Litigation

Abstract

This study present a theoretical analysis of contingent fee and hourly wage contracts for legal services. In contrast to previous analyses, it concludes that with risk neutral plaintiffs and attorneys, the contingent fee induces the amount of attorney's effort that would be chosen by a fully informed plaintiff who was paying an attorney by the hour. Both the expected gross recovery and the expected attorney's fee are the same under a contingent fee as they are under an hourly fee system. For the risk averse plaintiff, expected utility is unambiguously higher with a contingent fee. Empirically based estimates show that regulation of contingent fees may have significant effects on the number of suits and the size of awards.

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